As a result of the crash in the Toronto housing market last year, fewer
homeowners in Toronto are engaging in home renovations. You may think that this
is a contradiction in that the more renovations done to a home, the easier it
will be to sell. The problem is not that the homeowners don’t want to do
renovations. It is that they do not have the money needed for these renovations.
Just a few years ago when house prices were on a tear in Toronto, a few simple
renovations to a home would fetch a high price when the home went on the market.
Due to the high prices many homeowners had a lot of equity built up in their
homes, even without making a large down payment on the mortgage. They could
easily obtain a home equity loan for up to 100% of the equity to carry out
renovations. However, with the Toronto
real estate market almost grinding to a halt last year, all these sources of
funding for home renovations no longer exist. The falling values of homes means
that many homeowners now find themselves in a negative equity situation, which
means they owe more on the home than it is worth on the market.
During the housing boom of 2005 and 2006, millions of homes in Toronto went
through upgrades and renovations, especially to the kitchen and bathroom areas
of the home. New cupboards were installed with granite countertops, whirlpool
tubs and home spas were installed and the flooring in both rooms was upgraded to
laminate, hardwood or ceramic tile. High-end appliances, such as stainless steel
stoves, fridges and dishwashers were all the rage. What was once a mediocre home
became a luxury home on the market.
In most cases, when homeowners completed the renovations and sold the property,
they were able to recoup the cost of the renovations in the price for which the
home was sold. For many this was a great way to realize a profit at a low cost.
Today, the cost of renovations has skyrocketed and the materials needed to make
upgrades are beyond the reach of many. With so much excess houses on the market,
why would anyone want to invest time and money into renovations for a home that
might not sell. If the homeowner is able to secure a home equity loan or a
second mortgage, this will seriously cut into the finances in the extra monthly
payment required. Those who have done renovations with an eye to making a profit
are realizing that they are only recouping about 70% of the cost of renovations
in the sale.
Homeowners in Toronto who are considering making upgrades to their homes hoping
that this will give them a better deal in the price should take a second look at
the state of the Toronto real estate market. It does not mean that you shouldn’t
renovate, but it does mean that you should look at the cost of the materials and
perhaps scale down the renovations. You shouldn’t go all out with the most
expensive of everything, especially if you are planning on selling within the
next three years. If so, you will incur a loss because you won’t get the price
you need for the home in order to make a profit as a result of the upgrades.
Getting a home equity loan is not as easy as it was a few years back. Lenders
now look closely at the credit rating of applicants and take the debt to income
ratio more seriously than they did when lending restrictions were more relaxed.
They are more wary of making risky approvals for fear of the homeowner
defaulting on the loan or that the lender may have to foreclose on the property.
Default rates and foreclosure rates as a result of home equity loans have
doubled in the past year alone.